BUSINESS STRATEGY

Part 6 of a 6-part series

[Part 1, Part 2, Part 3, Part 4, Part 5]

The previous five articles in this series were designed to give you an overview of a few corporate strategies that can be applied to your business.BUSINESS STRATEGY

Part 6 of a 6-part series

[Part 1, Part 2, Part 3, Part 4, Part 5]

The previous five articles in this series were designed to give you an overview of a few corporate strategies that can be applied to your business. Although simplified for the purpose of creating a “method to the madness”, the themes can be applied to practically any business situation. In this concluding article, I will address a few loose ends and questions that are commonly asked.

1. I tried to apply one of your strategies, but I am confused.

In writing an article, there is always a struggle between making things too simple and too complex. If the article is too simple, people may not be able to apply the theories correctly. If there is too much detail, the reader doesn’t understand the point of the article.

In answering the above question, you must understand that each of these strategies requires documentation to make them functional. Whether you retain me or someone else, it is vital that use an attorney to assist you. You will note that there is a phrase at the bottom of each article detailing that the articles are for “general education purposes” only. No article will apply exactly to your situation, so be smart and get it done right.

2. I found an Internet site that will incorporate me for $99. Why should I use you?

As is true with everything, you get what you pay for in the business world. Most domestic online companies will indeed incorporate your business for you. They fail to mention that the $99 doesn’t cover state filing fees, but that is another subject. The service will provide you with a nice corporate book, a copy of example bylaws and a few really impressive $5 stock certificates. The process typically takes anywhere from a few weeks to a few months. Assuming that such a delay is fine from a timing standpoint, you are left with a corporate shell that has bylaws that don’t apply to an adult business. What documents do you need to open a bank account? Do you need a tax identification number? Should you try to qualify as an “S” corporation? What is a corporate meeting and how often do I need them? How do you sell shares in your company to raise money? None of these questions will be answered by the service.

What if you need a corporation in a rush? We had the California Secretary of State approve a filing in two days a few weeks back. Yes, for an adult Internet company.

“So what? I’ll figure it out eventually. What does it matter?”

The form and function of your corporation is very important because you obtain asset protection only if the corporation is formed and run correctly. In every state of our country, there is a method for defeating the protection provided by a corporation. This method is loosely known as “piercing the corporate veil”. If an attorney can prove that your corporation was not formed correctly or is not being run as a corporation, then a court will consider your corporation to be a sham and will make your personal assets available to the plaintiff’s attorney. To this end, the first move a plaintiff’s attorney will make when suing you is to determine if a service or an attorney formed your corporation. If it was formed by a service, the plaintiff’s attorney will focus on attacking the validity of the corporation. Why? The attorney knows that you were not advised on how the corporation must function and thus have most likely not complied with such basic things as issuing shares or filing the proper corporate minutes to get the corporation up and running from a legal standpoint.

As an example, I once was asked to review a matter for the purpose of determining if an appeal was warranted. The defendant in the case had formed a corporation for the purposes of manufacturing products. He had purchased the corporation online, but had never consulted with an attorney until he was sued. The company was fairly successful, but was inevitably sued over an alleged defect with the product. The defendant lost the case and the court ruled that the corporation was a sham. The court’s ruling was grounded in the fact that the defendant did not understand that his finances and the finances of the corporation were not the same. To this end, the plaintiff’s attorney was able to prove that the defendant was paying all of his personal bills out of the corporation, claiming income incorrectly as personal revenue, and generally commingling corporate assets with personal assets. Unfortunately, there was nothing that I could do based on the gross misuse of the corporation. He received what he paid for and $99 did not buy much.

3. Do I have to be the resident agent since I run my business from home?

In every state, a corporation must list a person that will receive service of process for the corporation. In short, this is the person who will be sent official government documents and be served with lawsuits. Since many small businesses are based in residences, they do not want to list themselves as this person. There is a certain embarrassment factor involved if your neighbors see a process server or marshal show up at your home. The agent for process of service, or “Resident Agent”, does not have to be located at the physical address of the business. In practically every state, you can retain an independent person to act as your resident agent for the purpose of receiving such documents. I provide such services in California, but you can use any number of services or attorneys in your state. Retaining an agent for process of service allows you to avoid uncomfortable glances from your neighbors. You can expect to pay $75 to $150 a year for the service.

4. Can I name my company SlutxxxSlutxxxSlut, Inc.?

Why would you? The purpose of a corporation is to provide a shield protecting your personal assets. Why name it something that is going to attract attention? When you buy an alarm system for your house, do you leave your valuables in the front window? If you wish to present a particular image in the industry, you can always use a bland corporate name and then file a fictitious business statement using something more colorful. Using a colorful corporate name can only result in unwanted attention from government and tax authorities. If you were an IRS agent, would you rather audit an adult site or Boring Company, Inc.? If you said Boring Company, Inc., you are in the wrong business!

5. Does a corporation protect me From Criminal Prosecution?

No. Do not form a corporation and then put bestiality up on your site. A corporation is designed to protect you from civil liability and unwanted publicity. As an example, Enron has a large number of people on its Board of Directors. How many can you name? One? Regardless, a corporation will not protect you from obscenity charges or most criminal prosecutions.

In Closing

This is the concluding article for this corporate series. It was my goal to create at least a modest level of comfort for you when considering business entity options. In doing so, I can only hope that I have not raised more questions than answers. If you have questions or do not understand one of these concepts, do not hesitate to contact me. As a general guideline, I will explain the concepts as stated in the articles. If you have questions about your particular situation, you can expect that I will ask for a fee or at least a membership to your site! Remember, you get what you pay for in business.

Richard Chapo is the lead attorney for AdultInternetLaw.com, based in San Diego, California. AdultInternetLaw.com provides legal services to adult businesses, focusing on business strategy, corporate and contract preparation and site reviews. He can be contacted at adultlaw@yahoo.com. This article is for general education purposes and does not address every facet of the laws surrounding the subject. Nothing in this article creates an attorney-client relationship.

BUSINESS STRATEGY

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